Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about how to buy Treasury bonds and various buying strategies to consider Because after I discussed buying Treasury bonds with over a 4% yield Many people email me asking me how to do it and also I spent three hours writing a new post on how to exactly buy Treasury bonds and I came to some Realizations that I think many of you will appreciate first of all Treasury bonds have been zooming higher the 10-year bond yield reached 4% the morning of September 28, it hasn't been there since 2007 it's been a while folks and it's interesting because there is not more demand during the Treasury bond auctions It's weird to me that 4% doesn't seem attractive because I can see in 3, 4, 5 years when we look back on today We might think to ourselves Wow, we could have locked in 4% risk-free rate of return over a 20-year time period Hmm, not bad, but nobody knows the future which is why investing is so interesting So hard and why we need to invest for the long term in a proper asset allocation framework If you don't know what a Treasury bond is, that's okay They are risk-free investments if you hold them until maturity Treasury bonds are issued by the United States federal government the Treasury to finance projects or and day-to-day operations as Inflation and inflation expectations rise and fall so do Treasury bond yields now There are two ways to buy Treasury bonds.

The first way is through Treasury direct Treasury direct gov It's a terrible website super cumbersome Don't lose your password folks because you're gonna spend an hour trying to get someone on hold to reset it But if you go to Treasury direct gov, you can buy all sorts of bonds You can buy I bonds Hopefully y'all bought 10,000 worth at the end of 2021 when I was talking about it and the beginning of 2022 Because these bonds have outperformed the stock market obviously year-to-date and will probably continue to outperform For the rest of the year now you go to Treasury direct gov and you can click buy direct Select bonds or bills so Treasury bills are Bonds that have a one year or less duration Treasury bonds are bonds that have a duration of Beyond one year, but you can just call them Treasury bonds in general So Treasury direct sells bonds directly to you at auction at par value So you're buying the bond at $100 per share This is very different from the second way to buy Treasury bonds Which is through your online brokerage account like Fidelity Charles Schwab or E*Trade These are the giants you pay a nominal fee by receiving a lower bond yield usually about three to five basis points lower So we're talking instead of let's say getting a four point two five percent yield to maturity You'll get four point two percent because this is a marketplace online brokerage accounts provide a marketplace for Treasury bonds and other bonds that have already been issued and they're just trading up and down depending on the economic Environment.

This is the main difference Treasury direct gov You're buying directly from the Treasury Department at par value you get the coupon you get the yield to maturity Whereas when you buy US Treasury bonds on online brokerage accounts their marketplace and these bonds could have been issued years ago With different coupon payments and different yields if you click the post in the show notes, you'll see a step-by-step Direction guide on how to buy bonds via Fidelity.

I use Fidelity. I've used them for over 20 years I think they're great But the quickie here is to log on to your Fidelity account if you have one go to the tab news and research Click fixed income bonds and CDs and then you'll see a whole bunch of bonds a nice table organized by US Treasury corporate bonds municipal bonds And then you'll see each bond yield by duration and then you just click that link and then you can sort through the marketplace To see which bonds are most attractive now This is the point where it can get a little bit confusing because you might click a duration a type of bond and you'll see Ten of them listed.

Well, what's going on there? Well again Fidelity Vanguard eTrade Charles Schwab. They are marketplaces. So once you click the appropriate time the maturity You're gonna see a whole bunch of bonds being sold by individuals or institutions Most likely and you can pick or choose some you'll see well, why is the coupon?

1.625% Well, another coupon is only 0.25% Well, the reason why is because at the time of issuance of these bonds directly from the government Those were the coupon payments, right? so what you want to look at is the yield and if you're looking for let's say a Two-year Treasury bond.

Well, it's around four point three percent right now So if you click the link, you'll see a whole bunch of bonds being offered at around between let's say four point two seven five percent to four point three two five percent So you'll notice when you click through the individual bonds They were all issued at different dates.

So different dates different time periods different coupon rates But they will all be expiring in two years time So in this case 2023 around September or October And so you got to sort through that and so if you've been wondering why the coupon payment is so different. It's because Different dates and so you will notice that you can buy these Treasury bonds at a discount to par value And if you hold them to maturity, you're gonna get that semi annual coupon payment usually and you'll get a hundred dollars per share So if you bought let's say it at ninety seven dollars and twenty cents and it Expires not expires and matures in one year You'll get a hundred dollars back plus the coupon payment for a yield of about four point three percent Hope this makes sense.

If not read the post listen to this example again Bonds are confusing because the price movements are inverse bond Prices go down yields go up and vice versa now if you want to take more risk You can purchase longer duration CDs Treasury bonds or municipal bonds The risk here lies in liquidity risk and real interest rate risk not principal risk Because you plan to hold it to maturity if you don't hold the bond to maturity you can end up on this marketplace because You know you needed the liquidity and so you sell at a discount to par For example, let's say you purchase a 20-year municipal bond, but need the money before 20 years You will likely have to sell at a discount Now if you lock in a 10-year Treasury bond at let's say three point nine two percent But inflation continues to increase then you've locked in a sub optimal yield.

Why is it sub optimal? well, it's because you could have waited and Purchased a different or new 10-year Treasury bond that had a higher yield now finally if you want to take even more risk, you can purchase corporate bonds all the way down to be a and BBB rated corporate bonds now corporate bonds are higher risk because corporates have a higher default and Bankruptcy rate than municipalities and the federal government, right?

We see corporations come and go all the time in the history of time But the United States government has stayed sovereign. It's stayed here for hundreds of years now Okay, so three reasons why you might want to buy US Treasury bonds one You want a risk-free investment with a higher yield if US Treasury bond yields are higher than yields for savings accounts and CDs Then buying a Treasury bond with the same duration makes sense US Treasury bond income is also not taxed at the state level So if you live in high income tax states such as California like I do New Jersey, Connecticut and Hawaii US Treasury bonds offer relatively higher returns - the risk-free yield is attractive relative to your inflation Forecasts and also stock return forecasts For example, you could buy a five-year Treasury bond today yielding about four point one eight percent If you believe inflation will decline from let's say eight percent now to two percent in one year You will earn a two point one eight percent real yield for four more years If you hold to maturity in addition, you could sell the five-year Treasury bond for a profit since it will likely increase in value How much the principal value of the Treasury bond increases will depend on inflation expectations however The Treasury bond could also increase in value to the point where the yield is at parity to the two percent inflation rate at the time in other words while holding this bond you could earn that coupon payment and Earn a greater return because the principal value has appreciated by more than the yield Let's say it might have appreciated by like eight percent eight percent plus and say the one Percent coupon payment that's a nine percent return This is thinking like a bond trader acting like a bond trader and my final Favorite reason for why you want to buy US Treasury bonds today Or maybe any point in the future is if you have a low mortgage rate and you like the idea of living for free Who doesn't love living for free or getting something for free even ultra rich people have a difficult time passing on a free lunch So if you want to connect with someone offer them a free lunch offer them coffee drinks, whatever it is Heck this podcast is free and financial samurai commas free and the newsletter is free You might as well subscribe and listen to it.

There's no downside, especially since I have over 25 experience Working in finance and writing about finance now back to the low mortgage rate and living for free The majority of mortgage holders have a mortgage rate below the yield of a one-year Treasury bond or longer duration in other words The mortgage rates majority people have are below 4% Therefore mortgage holders can simply buy US Treasury bonds to live for free for the next 30 years For example, you could buy a 30-year Treasury bond right now at about 3.8 percent yield for the last two years Most mortgage borrowers were able to refinance to a 30-year fixed rate of 3% or less Everybody who comments on my mortgage related posts say they got 30-year fixed rate mortgages for 2.75 percent or less Therefore not only could you live for free for the next 30 years, but you could also live for free and earn risk-free income Now the only catch is that to truly live for free you need to buy an equal amount of Treasury bonds to your mortgage amount But even if you can't which most of us can't every dollar you do spend buying higher yielding Treasury bonds is an arbitrage That lowers your true living costs.

I want to end this episode by discussing Treasury bond buying strategies In a nutshell in a rising interest rate environment Buying shorter duration Treasury bills is the optimal strategy and in a declining interest rate environment Buying longer duration Treasury bonds is the optimal strategy Now, why is that? Well in a rising interest rate environment Rates are continuing to go up.

So you want to take advantage of the wave up you buy three month Treasury Bills or maybe nine month Treasury bills because when you get your money back you can reinvest in an hopefully even higher rate Now in a declining interest rate environment or a potentially declining interest rate environment You want to go a little bit longer on the yield curve?

maybe you get a one-year two-year or three-year Treasury bond with a higher yield and that way you can lock in that higher rate so as Inflation and interest rates decline over the years. You'll be sitting pretty your bond will increase in value and your real Yield will also grow so before you buy a Treasury bond You should have a buying strategy based on your liquidity needs financial goals Existing net worth asset allocation and your inflation forecast So we just talked about inflation forecast, which it's not really that easy to figure out But we need an opinion before we buy a Treasury bill or Treasury bond at a certain duration for the lowest risk easiest No-brainer strategy to buying Treasury bonds is to buy the shortest duration Treasury bond available this way You have minimal liquidity risk and you can always buy more short-term Treasury bills at their latest rates So in other words, you can just keep on buying three month Treasury bills You're gonna get a lower yield but after three months you can just buy again and you can keep on rolling that and you'll have No real liquidity risk, especially after three months if you're buying Three month bills every month.

The thing is eventually greed starts taking over. We're thinking to ourselves Well, why buy a three-month Treasury bill with a three point five one percent yield when I could get four point four five percent On a three-year Treasury bond. It's a pretty big difference especially if you have a significant amount of cash if you are unsure about the future macroeconomic environment as Most of us are you can simply hedge by buying a variety of Treasury bond durations Let's say you have two hundred fifty thousand in cash with enough cash flow every month to cover your monthly living expenses by at least 2x So with a 70% conviction level as I discuss in my book buy this not that You believe inflation has peaked in one year's time.

You believe headline inflation will drop from 8% today to 3.5% You also want to upgrade your home in three years Here's what you could buy out of the 250,000 you have a hundred thousand worth of three-year Treasury bonds Yielding four point four percent because you have strong monthly cash flow You don't need the 250,000 you match 40% of your cash hoard with your liquidity needs to get the highest Yield possible at the time Then you buy 50,000 worth of two-year Treasury bonds yielding four point three one percent that zero point seven percent spread is Insignificant you're not gonna even notice it So you buy two years instead of three years because just in case you find an upgrade home in two years You want that liquidity so you can go buy it Then you buy 50,000 worth of nine-month Treasury bills yielding four point one three percent Psychologically you like the idea of still getting a four percent plus yield while looking up your money for only nine months Given there's still a chance.

Let's say 30% Inflation could stay elevated for longer. You want your money back sooner this way You can reinvest in a potentially higher yielding Treasury bill or bond in nine months And then finally you buy 50,000 worth of three-month Treasury bills yielding three point five three percent Although you're not getting a more attractive four percent yield you get greater peace of mind knowing you get your money back after only three months just in case rates continue to rise You can reinvest at a higher rate anything can happen during this most uncertain time We all know this so it's always nice to stay liquid in conclusion the year 2022 will unfortunately go down as one of the worst years ever for the bond market as a result Buying Treasury bonds now actually looks very enticing.

Hopefully not many of us were buying bonds in 2020 or 2021 Because the yields were pitiful in 2020. We're talking about zero point six percent on the 10-year bond yield So why would you bother buying that? receiving only such a low yield and Facing a risk that bonds could sell off if interest rates rise and that's what we've all seen And is this revisionist history is this you know, looking back 2020 and saying oh, well, of course We should have done that or could have done that Not really because we've been talking about this for years how bomb didn't seem attractive one or two years ago But it's all about thinking about what next what now in my humble opinion Buying any Treasury bill or bond with a yield greater than four percent is attractive I would go up to three-year duration where you can get around four point four percent Because that's 15 plus year highs and if inflation does roll over over the next one to two years You're gonna be sitting pretty with a three-year Treasury bond yielding four point four percent And here's an argument for why you might want to buy even longer Duration Treasury bonds in five years ten years twenty years also yielding over four percent Because of future expected returns we know in a previous episode and in a previous post how I discussed Mmm lower future expected returns from Vanguard and other houses.

For example Vanguard expects four point oh two percent annual returns for stocks over the next ten years Bonds expectation is one point three one percent per year over the next ten years That seems pretty low. But if those are real if they turn out to be real then locking in a risk-free Ten-year Treasury bond yielding four percent is a no-brainer Now unfortunately, nobody knows the future so Vanguard could be totally wrong.

So could many other investment houses? But what I do know is that getting a four percent plus risk-free rate of return without having to pay state taxes is attractive I love the concept of living for free and if the Fed insists on crushing the economy We might as well take advantage and earn a higher risk-free rate return on our cash The biggest hurdle we have to overcome is probably greed and slashing hope, you know We have greed and we have hope that ten percent historical return averages for stocks could return again Yeah, they very well could so to be able to buy bonds means to be able to be okay with having lower return rates And it depends on where you are in the journey if you are retired you're looking at principal protection capital preservation Then all the more reason to buy US Treasury bonds with a yield of over four percent if you're still young in your 20s and your 30s and you're trying to take More risk and build your capital nut then locking your money away risk-free for four percent plus May not be that attractive.

Alright, that's it folks I hope you enjoyed this episode and if you'd like to support my work please pick up a hard copy of buy this not that at financial samurai comm forward slash b TNT and if you want to subscribe to my free weekly newsletter, please do so at financial samurai comm forward slash news and EWS